Social Issues

Foreign Aid Isn't Charity. It's an Investment

U.S. Secretary of State John Kerry at the 10th-anniversary celebration of the President's Emergency Plan for AIDS Relief (PEPFAR) on June 17, 2013, in Washington

One of the few bright spots of bipartisanship on Capitol Hill of late has been in global development. The House recently passed a bill to support President Clinton’s Power Africa initiative, which is designed to boost access to electricity across six countries in the region. Both houses also managed to reauthorize PEPFAR—the President’s Emergency Fund for AIDS Relief— which provides antiretrovirals to almost 7 million people worldwide. The U.S. still ranks near the bottom of the list among rich countries in terms of the generosity of its overseas development program, but these two pieces of legislation at least suggest that altruism and fellow feeling have not completely evaporated in Washington.

Nonetheless, U.S. foreign assistance—and aid programs the world over—face a real challenge. What limited popular support foreign-aid programs enjoy is due mainly to charitable impulses and the warm glow of “doing something” in the face of crisis. Yet new research suggests that this approach to raising funds can do significant collateral damage to the efficiency of assistance we provide. It’s time to view aid as an investment—like spending on roads and schools here in the U.S.—rather than an act of charity. In the long term, that will lead to more effective aid and possibly more assistance overall.

Economists Dean Karlan and Daniel Wood used fundraising letters from the charity Freedom from Hunger to test how information on the organization’s work affected donations. They sent out some fundraising letters that discussed the program’s impact both with a story about an individual beneficiary and as measured by a high-quality independent evaluation. They sent out other letters that only discussed the impact on an individual beneficiary.

You’d think that solid, quantitative evidence of impact—in this case that Freedom from Hunger’s work with small entrepreneurs improved business practices and increased the reliability of their revenues—would encourage people to donate. But among recent small donors, the evaluation information actually reduced giving compared with an appeal based solely around anecdotes and stories.

The authors argue that small donors are motivated by what they call “warm glow”—the feeling of happiness that comes solely from giving. For those people, evidence of impact “turns off the emotional trigger for giving, or highlights uncertainty in aid effectiveness”—leading to lower donations. However, Karlan and Wood noted that large donors actually increased giving when presented with evidence of impact. The researchers suggest big donors are motivated by the happiness that comes from actually seeing a difference being made by their money.

Karlan and Wood’s study illustrates a problem with foreign aid in general. As with charities, donor agencies often couch their appeal in terms of individual stories, with plenty of photos of smiling kids. They’re appealing to the “warm glow” small-donor crowd. That might seem to make sense, since aid is a tiny part of government spending. Annual Overseas Development Assistance provided by the U.S. adds up to about $100 per person—less than 1 percent of the federal budget. But treating aid like it’s pennies in the charity box distracts us from thinking of aid as an investment. And as a result, the money we do spend on foreign aid has far less impact than it should.

When we think of charitable giving, all too often that comes with judgment: We need to help these people because of their failings. The thinking goes that poor people are poor and need help because they are lazy, or ill-educated, or their political leaders are incompetent or corrupt. And that leads us to guard our money against their failings—attaching lengthy conditions around who spends the money, how they spend it, and on what. The focus on the giving rather than the impact means aid agencies spend far more time making sure the money gets to where it’s intended rather than making sure it achieves something when it arrives. The attention is on receipts, not results.

As a result, the World Bank spends far more on hiring procurement and financial management specialists, as well as investigators looking for fraud and corruption, than it does on evaluating if its projects actually achieve anything (PDF) when it comes to improving wealth, health, and wellbeing. Or look at the U.S. government auditor for Afghanistan, who has trashed a health project in that country, which helped it rack up the biggest gains in life expectancy anywhere in the world over the last 10 years, because the Afghan Ministry of Health didn’t have satisfactory financial controls (not that there was any actual evidence of wrongdoing).

To make aid more effective, we should see it as an investment and focus on making sure we get what we want back from that investment. For example, developing countries already emit more carbon dioxide from energy production than the developed world and will account for about two-thirds of global emissions by 2040, according to the U.S. Energy Information Administration. That suggests if we want to avoid climate change, aid could play a vital role in helping the developing world achieve universal modern energy access using low-carbon technologies. We should also work with developing countries to develop and roll out responses such as vaccinations to fight infectious diseases. Finally, to the extent we see people living on less than one-tenth of the U.S. poverty line as an abomination, or want to expand markets for our exports and create new investment opportunities for our retirement portfolios, we need to partner with developing countries to invest in global economic growth. Instead of channeling aid to the countries and companies that are the best at bookkeeping according to the arcane rules of the donor system, we should fund our aid programs—and allocate resources—on the basis of where aid has shown the greatest return in generating the outcomes we want.

Focusing on investment returns will not only lead to more effective aid, it might also lead to more aid overall. Crying crisis and promoting pictures of kids with distended bellies is a powerful way to drum up interest and donations in the short term, but it creates aid fatigue: If they’re still in crisis after all our help, then our help surely can’t be working. It’s far more sustainable to build support on a record of measured success. Survey evidence suggests that 80 percent of Americans agree with the statement “If I had more confidence that the aid we give to African countries would really help the people who need it, I would be willing to increase the amount we spend on aid to Africa.” If we tried better measuring progress and focusing aid where it maximized results, that would provide greater confidence that aid can “really help.”

It’s time to think of aid as one of a number of tools—alongside other financial flows, trade, the movement of people, and the creation and spread of new technologies—that promote sustainable development abroad to the benefit of all, here and overseas. And when we use aid as a tool to buy that development, it’s no use just demanding a receipt. We should demand results.